) reported strong second-quarter earnings of 49 cents per share,
which comfortably surpassed the Zacks Consensus Estimate by 8
cents. Earnings increased significantly from 11 cents reported in
the year-ago quarter and from 31 cents in the previous
However, shares plunged 4.0% in after-hours trading due to
lower-than-expected growth in subscriber base.
Although revenues jumped 20.3% year over year to $1.07
billion, it lagged the Zacks Consensus Estimate. Sequentially,
the revenue growth was a modest 4.4%.
Robust subscriber additions in Netflix's streaming business
(both domestic and international) led to the year-over-year
improvement in top line. Notably, Netflix's paid streaming
subscriber base (both domestic and international) increased 38.6%
on a year-over-year basis to 35.6 million. Sequentially, the paid
subscriber base increased 4.1%.
Total streaming subscriber base increased 36.3% to 37.6
million. Sequentially, total subscriber growth was up a modest
3.4%. Moreover, the company witnessed strong growth in Brazil
despite its price rise from 15 BRL to 17 BRL.
At the end of the second quarter, revenues from Netflix's
domestic streaming business increased 26.0% from the year-ago
quarter to $671.1 million (management guidance was $664.0 million
- $673.0 million). Sequentially, revenues increased 5.1%.
Revenues from international streaming business were up a
staggering 155.3% year over year to $165.9 million (management
guidance was $156.0 million - $170.0 million). Sequentially,
revenues increased 16.8%.
However, Netflix's DVD business continued its declining trend
in the second quarter as well. Revenues declined 20.3% year over
year to $232.4 million in the quarter. Sequentially, revenues
decreased 4.5%.Total subscriber base declined to 7.5 million from
9.2 million in the year-ago quarter.
Operating profit for the quarter jumped 253.6% year over year
to $57.1 million, primarily due to higher revenues. Additionally,
lower-than-anticipated content spending also helped operating
Contribution profit from domestic streaming segment increased
73.0% year over year to $151.3 million. Contribution loss from
international streaming segment was down from $89.5 million to
$65.8 million. Contribution profit from Netflix's DVD business
declined 18.8% year over year.
Expenses were up 16.0% year over year, primarily due to higher
cost of revenue (17.1% year over year), technology expenses
(14.2% year over year) and general and administrative expenses
(28.7% year over year). Marketing expenses increased 6.8% on a
Net income for the quarter was up from $6.2 million to $29.4
Exiting second-quarter 2013, Netflix had $1.08 billion in cash
and cash equivalents (including short-term investments) compared
with $1.03 billion in the previous quarter. Long-term debt stood
at $500.0 million at the end of quarter under review.
Netflix had $33.9 million in cash flow from operations. The
company reported free cash flow of $12.9 million.
For the third quarter, management forecasts earnings per share
between 30 cents and 56 cents. Net income is expected in the
range of $18.0 million to $34.0 million.
Domestic and International streaming revenues are expected in
the range of $693.0 million - $701.0 million and $170.0 million -
$184.0 million, respectively.
Management expects total subscribers in the domestic streaming
market and in the international streaming market in the band of
30.5 million to 31.3 million and 8.3 million to 9.0 million,
Netflix is expected to step up its spending on contents in the
fourth quarter, which will impact margins.
Netflix reported a better-than-expected quarter on the back of
higher subscription additions and provided an encouraging
guidance. Moreover, new streaming content additions through
licensing deals will help the company to counteract stiff
competition from other service providers such as
However, Netflix's continuous subscriber loss in its DVD
business can be a headwind going forward. Moreover, the company's
increase in content spending is expected to impact margins in the
Currently, Netflix has a Zacks Rank #1 (Strong Buy).
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